Here's Why WuXi Biologics (Cayman) (HKG:2269) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies WuXi Biologics (Cayman) Inc. (HKG:2269) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for WuXi Biologics (Cayman)

What Is WuXi Biologics (Cayman)'s Net Debt?

As you can see below, WuXi Biologics (Cayman) had CN¥2.15b of debt at December 2023, down from CN¥2.78b a year prior. But it also has CN¥11.2b in cash to offset that, meaning it has CN¥9.10b net cash.

How Healthy Is WuXi Biologics (Cayman)'s Balance Sheet?

The latest balance sheet data shows that WuXi Biologics (Cayman) had liabilities of CN¥7.64b due within a year, and liabilities of CN¥4.92b falling due after that. On the other hand, it had cash of CN¥11.2b and CN¥6.68b worth of receivables due within a year. So it can boast CN¥5.36b more liquid assets than total liabilities.

This short term liquidity is a sign that WuXi Biologics (Cayman) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that WuXi Biologics (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that WuXi Biologics (Cayman) saw its EBIT decline by 9.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if WuXi Biologics (Cayman) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While WuXi Biologics (Cayman) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, WuXi Biologics (Cayman) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Biologics (Cayman) has CN¥9.10b in net cash and a decent-looking balance sheet. So we are not troubled with WuXi Biologics (Cayman)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for WuXi Biologics (Cayman) (of which 1 shouldn't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.